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Chapter 12

1.2 Step 1: Identify the contract

IFRS 15 Revenue from Contracts with Customers says that a contract is an
agreement between two parties that creates rights and obligations.

An entity can only account for revenue from a contract if it meets the following
criteria:

 the parties have approved the contract and each party’s rights can be identified

 payment terms can be identified

 the contract has commercial substance

 it is probable that the selling entity will receive consideration.

Illustration 1

Aluna has a year end of 31 December 20X1.

On 30 September 20X1, Aluna signed a contract with a customer to provide
them with an asset on 31 December 20X1. Control over the asset passed to
the customer on 31 December 20X1. The customer will pay $1 million on
30 June 20X2.

By 31 December 20X1, as a result of changes in the economic climate, Aluna
did not believe it was probable that it would collect the consideration that it was
entitled to. Therefore, the contract cannot be accounted for and no revenue
should be recognised.

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